3. The Terrapins Investment Fund has a total investment of $500 million in five stocks.

Stock Investment (millions) Beta

1 $150 .6

2 120 1.2

3 80 3.0

4 90 1.8

5 60 1.0

Total $500

What is the funds overall, or weighted average, beta?

4. Refer to the previous problem. If the risk-free rate is 12% and the market risk premium is 6%, what is the required return on the Terrapins Fund?

5. Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:

A. What is the expected return of MGM stock?

B. What is the expected return of AEP stock?

C. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?

D. What is the expected return of that portfolio with the beta that you found in part c.?

E. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?